IMPACT OF WORKING CAPITAL MANAGEMENT ON FIRMS EFFICIENCY AND PROFITABILITY (A STUDY OF SELECTED COMPANIES IN PORT HARCOURT)

ABSTRACT

Working capital has been found to be an essential ingredient for the survival of a typical business organization. The way this is carried out could affect the profitability or effectiveness of the firm. This study was undertaken to investigate the ways company adopt to manage their working capital and the possible effect on the firm’s efficiency and profitability. Three (3) companies based in Port Harcourt were used as a study. Questionnaire copies were issued to management staff of these companies. Responses from these questionnaire provided the data for our analysis; Annual reports of these firms also provided the secondary data. To give the study a scientific focus, four (4) hypotheses were formulated and tested in the core areas of investigation. It was discovered in the study that most firms depend on the use of cash budget to determine the optimal cash to hold. Inability to use the cash models to determine the level of cash to shift to marketable securities and the possible balance to maintain at any particular period had rendered the working capital management ineffective in these firms. Based on the findings of this study, we recommended among others, that, firms in Nigeria should employ managers who are skilled on the use of financial models so as to be able to apply the necessary tools in the management of their working capital for effective result.

CHAPTER ONE
1.0      Introduction
1.1      Background of the Study
Working capital is an essential ingredient for the survival of a typical business organization (Ola 1982:89). Traditionally, working capital means a firm investment in net currents assets, that is, inventories, cash, marketable securities and accounts receivable.

Decision relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between firm’s short term assets and its short term liabilities. The goal of working capital management as to ensure that the firm is able to continue its operations and that, it has sufficient cash flow to satisfy both maturing short-term debt and up coming operational expenses.

Working capital management entails short term decision generally, relating to the next one year periods which are “reversible”. These decisions are therefore, not taken on the same basis as capital instrument decisions (NPV, or related as above). Rather, they will be based on cash flow and/or profitability. In this context, the most useful measure of profitability is Return on Capital (ROC). The result is shown as a percentage determines by dividing relevant income for the 12 months by capital employed. Return on Equity (ROE) shows that the result for the firm’s shareholders value is enhanced when and if the return on capital which results from working capital exceeds the cost of capital which results from capital investment decisions as above. (ROC) measures are therefore, useful as a management tool in that they like short-term policy with long-term decision making.


Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These require managing the currents assets, generally cash and cash equivalents inventors and debtors. These are also a variety of short term financing options which are considered.

Cash Management: Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

Inventory Management: Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials and hence increase cash flow.

Debtor’s Management: Identify the appropriate credit policy i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be off set by increases revenue and hence, return on capital (or vice versa).

Short term Financing: Inventory is wealth financed by credit granted by the supplier depending on the cash conversion cycle. It may be necessary to utilize a bank loan (overdraft) or to convert debtors to cash through “factoring”

The management hopes to achieve the following:

(a)              Management of the monies of the firm in order to attain maximum cash availability and minimum interest income on any idle funds
(b)              Obtain satisfactory credit from suppliers
(c)              To enjoy extension of credit during periods of cash shortage (Obara and Eyo, 2000)
(d)              The need for cash management is to balance liquidity with profitability (Aborode, 2005:225).
(e)              Managing inventory, in order to have optimal stock available at a point in time (Aborode, 2005:225)......

For more Accounting Projects click here
================================================================
Item Type: Project Material  |  Attribute: 99 pages  |  Chapters: 1-5
Format: MS Word  |  Price: N3,000  |  Delivery: Within 30Mins.
================================================================

Share:

No comments:

Post a Comment

See full list of FREE Project Topics under your Department Here!

Featured Post

Reporting and discussing your findings

This page deals with the central part of the thesis, where you present the data that forms the basis of your investigation, shaped by the...

Followers

Popular Posts